By Kevin Theissen
In 2021, the House Ways and Means Committee cleared a new bill, Securing a Strong Retirement Act of 2021, more commonly referred to as SECURE Act 2.0. There were some delays, but it was again brought up in the House and was passed on March 29.
In June, the Senate passed bills, and once reconciled with the House-passed SECURE Act 2.0 legislation, the final bill will be voted on by both chambers.
It primarily focuses on retirement issues and much of what is in the current proposals has bipartisan support is likely to become law.
Required minimum distributions
Required minimum distributions, commonly known as RMDs, impact all non-Roth IRA retirement account owners. RMDs will get pushed back from age 72 (current) to age 75.
RMDs would start at 73 if you turn 72 from 20222027, 74 if you turn 72 in 20282029, 75 if you turn 72 in 2030 or later.
IRA catch-up contributions will be indexed for inflation. Until now, the IRA contribution, plan salary deferral, plan catch-up contribution, and plan overall limits are all indexed for inflation — but not the IRA catch-up contribution limit. The new plan catch-up contribution would be limited in years a participant turns 62, 63 and 64. These participants would have following catch-up contribution limits beginning in 2023 —401(k)s and similar plans increased to $10,000 (from $6.5k currently) and SIMPLE IRA plans to $5,000 (from $3k currently). Many have thought Roth IRAs would be discontinued but catch up contributions would also apply to Roth IRA accounts, which suggest the Roth will be with us for a while.
SEP and SIMPLE Roth accounts
SECURE Act 2.0 would create SEP and SIMPLE Roth accounts, and would allow individuals to designate employer matching contributions to the Roth side. It seems that Roth SIMPLE IRA salary deferrals would work similarly to Roth 401k contributions.
Qualified caritable distributions
Significant changes to Qualified Charitable Distributions, or QCDs, could see significant changes. QCDs allow IRA owners that have RMDs to make contributions directly to charity and therefore not included in taxable income. The new proposed rules would index the $100k limit for inflation and allow a one-time, up to $50k QCD to a split-interest entity (e.g., CRAT, CRUT, charitable gift annuity) completely funded by QCDs.
The 50% penalty for missing an RMD would be reduced to 25% by this legislation. The 25% amount would be further reduced to 10% for errors timely and appropriately corrected within a correction window, which could be as long as three years.
Qualified student loan payments
Employers would be able to make matching contributions to a 401(k), 403(b) or SIMPLE IRA to the extent the participant made what would technically be known as a Qualified Student Loan Payment.
Retirement plan participation
The original SECURE Act made part-time employees mandatorily eligible for 401(k) participation once they had three or more consecutive years of 500+ hours. The new bill reduces it to two years. So, more part-time workers could access sooner. The bill states that to be considered a 401(k)/403(b), unless a participant opts out, the plan must auto-enroll them for first-year contributions of between 3% and 10% of compensation, and that percentage must increase by 1% annually until it gets to between 10% and 15%. This is important because auto-enrollment has an enormous impact on retirement savings.
There is much more in this legislation and many believe it has a very good chance of passing.
Kevin Theissen is the owner and financial advisor of HWC Financial in Ludlow.